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BRILLIANT’S Cost of Capital 329

(b) Since the coupon rate of new debentures and dividend rate of new preference share are
higher than existing, the whole amount of capital budget should be financed through equity.
5,25,000
No. of new equity share = 5,526 shares
95
Face value of Share 5,526 × 100 = ` 5,52,600
D 1 10

(c) Cost of new equity K   g   .07 17.53%
e
P 0 95
Cost of retained earning K = K (1 – t) = 17.53 (1 – .35) = 11.39%
r e
(d) Calculation of new WACC
Sources Amount Ratio Cost (%) Cost of Capital (%)
(`)
Debenture 4,00,000 4,000/16026 5.2 1.30
Preference Share 1,00,000 1,000/16026 9 0.56
10,52,600
Equity Share NPP 10,526/16026 17.53 11.51
Retained Earning 50,000 500/16026 11.39 0.36
16,02,600 13.73

Illustration 4.1.25
PQR & Co. has the following capital structure as on Dec. 31, 2015:
PQR E§S> H§$nZr H$s 31 {Xg§~a 2015 H$mo {ZåZ{b{IV H¡${nQ>b ñQ´>³Ma h¡…
Equity Shares Capital (5,000 shares of 100 each)
Bp³dQ>r eo¶g© H¡${nQ>b (5,000 eo¶g©, à˶oH$ 100 H$m) ` 5,00,000
9% Preference Shares / 9% àr’$a|g eo¶g© ` 2,00,000

10% Debentures / 10% {S>~|Mg© ` 3,00,000
The equity shares of the company are quoted at ` 102 and company is expected to declare a
dividend of ` 9 per share for the next year. The company has registered a dividend growth rate of
5% which is expected to be maintained.
H§$nZr Ho$ Bp³dQ>r eo¶g© H$mo `102 na H$moQ> {H$¶m J¶m h¡ VWm H§$nZr go AJbo df© Ho$ {bE ` 9 à{V eo¶a H$m {S>{dS>|S>
Kmo{fV H$aZo H$s Anojm h¡& H§$nZr Zo 5% H$s EH$ {S>{dS>|S> d¥{Õ Xa a{OñQ>S>© H$s h¡ {Ogo ~Zm¶o aIZo H$s Anojm h¡&
(i) Assuming the tax applicable to the company at 50%, calculate the weighted average cost
of capital and
‘mZm {H$ H§$nZr na bmJy hmoZo dmbm Q>¡³g 50% h¡, H¡${nQ>b H$s doQ>oS> EdaoO H$m°ñQ> H$s JUZm H$s{OE VWm
(ii) Assuming that the company can raise additional term loan at 12% for ` 5,00,000 to
finance its expansion, calculate the revised WACC. The company’s expectation is that
the business risk associated with new financing may bring down the market price from
` 102 to ` 96 per share.